5 risk factors creating management liability exposures for business leaders

Spurred by the pandemic and the turbulence of international affairs, the economy is experiencing a period of rapid change. In addition to standard business concerns, such as revenues, stock performance, and property exposures, there are other emerging risks that senior executives should consider.

“In 2020, we started seeing a lot of different risk factors that we haven’t seen before,” says Michael Englert, senior vice president and head of private/non-profit Financial Lines at Liberty Mutual. “It’s driven a rethink in how we shape our policies to respond to today’s complex exposures.”     In such an environment, there are plenty of worries for business leaders to juggle — and one of them is the question of whether they have adequate insurance coverage against financial losses related to management decisions and actions. Here are five factors creating management liability exposures for business leaders.

  While consumer and business spending has remained strong in the context of inflation, high interest rates, and the aftereffects of the pandemic, at some point, high rates will begin to cut into growth. And it is this prospect of a changing rate environment that has management teams paying close attention. “The economy has been so resilient based on all these economic headwinds and interest rates being super high — and it doesn’t seem it’s slowing down consumer spending. Is there a point that it’s going to substantially drop?” asks Englert. “Probably the biggest exposure, from a D&O (directors and officers) liability perspective, would be a bankruptcy filing.”

During a period of labor shortages in early 2021, many employers focused on hiring more personnel. With the pandemic raging and the future hard to predict, some companies even over-hired. Now, as an economic downturn becomes an increasing possibility, a number of businesses have had to resort to layoffs. However necessary this “right-sizing” may be, companies need to be thoughtful about these decisions to avoid the perception of discrimination and potential employment practices liability (EPL) claims.

Another labor-related risk factor comes in the form of the DEI programs that many companies have implemented to create a more diverse workforce and inclusive workplace. These programs, designed to address discrimination and bias in organizational policies, practices, and culture, can take the form of anti-bias trainings and changes in hiring practices. With the Supreme Court decision overturning affirmative action policies at colleges and universities, however, DEI practices at businesses are suddenly being looked at in a different light –– one that may even lead to lawsuits and EPL claims.

As AI tools become both more sophisticated and more prevalent, corporate risk factors go up. Consider that in February 2024, fraudsters used deepfake technology to impersonate a company’s chief financial officer in a video conference call to trick a Hong Kong finance employee into paying them $25 million. The news stunned brokers and risk managers, as it showed the degree to which AI can be used to stage social engineering attacks. Going forward, companies will need insurance solutions that help protect against social engineering attacks and updated cybersecurity protocols and employee training that address how cyber criminals are using AI and other emerging technologies.

ESG programs address the impact of a company and its investments on the environment; the social treatment of employees, customers, and other groups; and the operating practices that govern how it operates. In the past, ESG initiatives received little attention, but they may soon face more scrutiny. This spring, the Securities and Exchange Commission (SEC) released a long-postponed rule regarding climate-related disclosures; and there are several related risk areas that business leaders should be ready to discuss and address. “You could get sued for the representations your company is making. It’s a very different environment now than it was just five years ago,” Englert notes.

With today’s shifting risks, it’s clear that management liability coverage can be a critical line of defense for corporate leaders who are making employment, financial, and governance decisions.

Insurance carriers and brokers are also considering how these risks may affect the market and how policies should respond moving forward.

“Even with these emerging exposures, there’s an overabundance of capacity and the management liability market has softened rather quickly, especially in the public space,” says Englert.  “But claims in the sector are notorious for having ‘long tails’ and can take years to settle, so it will be interesting to see how new entrants in the market make out.”

In such an environment, partnerships with experienced insurance providers with proven track records become even more valuable. 

“Brokers and their insureds are seeking carriers who are willing and able to create products tailored to their needs. We developed our new management liability packaged solution, ProShield, with that in mind,” says Englert.

Developed based on feedback from brokers about the risks of most concern for insureds, ProShield offers coverage for a variety of management liability exposures, including D&O, employment practices, and fiduciary liability, together with crime insurance and coverage against social engineering attacks — including AI deepfakes.

“Our goal was to make sure we could develop a solution that checks as many boxes on that list as possible,” Englert says. “We want market-leading, comprehensive coverage that’s also flexible.”

While business leaders may not be able to control interest rates or the latest cyber threat, with the right insurance partner and insurance solution, they can protect themselves and their companies against the losses caused by many of today’s shifting management liability risks.

Learn more about ProShield here.